Ex-Googlers Design an Algorithm for Investing in Young Entrepreneurs

3/18/13Follow @wroush

“Venture capitalists have long said, ‘We invest in people, not ideas or businesses.’ Well, not really. We are the first people really doing it.”

So says Dave Girouard, the founder of Upstart, a new operation in Palo Alto that’s part loan agency, part investment fund, part mentoring network, and part dream factory.

Made up mostly of ex-Googlers—including Girouard, who formerly led Google’s $1 billion enterprise apps division—Upstart finds up-and-comers in their early 20s and helps them raise modest amounts of money, usually enough to allow them to pay off student debt or cover living expenses while bootstrapping a startup. In return, these “upstarts” agree to pay backers a slice of their future income—up to 7 percent per year for 10 years.

You could look at Upstart as a really fancy bank, where the loan applicants are screened using sophisticated algorithms that calculate their likely future income based on factors such as their GPA, the schools they went to, and their past job offers. You could look at it as a Kickstarter-like crowdfunding platform, since the actual money comes from accredited investors who cruise Upstart’s profiles and choose which of the approved applicants they want to back. Or you could see it as a radical new type of angel fund, where the risk to investors is that some of the upstarts will end up in low-paying jobs, and the potential reward is that a few of them will see huge windfalls when they sell their own startups.

Dave Girouard, founder of Upstart

Dave Girouard, founder of Upstart

Either way, Girouard believes it’s time to find a Google-style solution for the problem faced by many talented young people: Just when they’re yearning to test their creative potential, they’re saddled with financial obligations that often force them into cookie-cutter corporate jobs. “People in their twenties are illiquid,” Girouard says. “They have the burden of student debt. They are not credit-worthy in any traditional sense. And they are generally forced to make a decision to deal with what is, in effect, a short-term economic challenge.”

The big idea at Upstart is to use mathematical models to find the most promising of these people and, in effect, help them borrow from their future selves. “The thought is to allow them to pull maybe $30,000 or $40,000 or $50,000 from their future, when they are statistically almost guaranteed to be successful, to the present, when that money could have the most impact,” Girouard says. That way, they won’t have to take a job they aren’t really excited about, or forego a dream like starting their own company.

Upstart debuted last April and has raised $5.25 million in venture backing of its own, from marquee firms like Kleiner Perkins Caufield & Byers, NEA, First Round Capital, and Google Ventures, as well as individuals like Salesforce CEO Marc Benioff, IronPort Systems co-founder Scott Banister, and Dallas Mavericks owner Mark Cuban. It’s starting small—so far, it’s funded only three dozen upstarts—but Girouard says the organization intends to scale up the program vastly.

“With the Google background in us, we can’t help but want it to be Gmail-like in size,” he says. Over time, the company will earn money by keeping a 3 percent share of the money upstarts raise, as well as an annual fee of 0.5 percent of the backers’ invested funds.

It’s far too early to tell whether any of this will work. But several of the early upstarts say the program has already freed them to pursue projects that would otherwise have been out of reach.

Omri Mor, a 2012 graduate of the University of Washington’s Foster Business School, says he had $182 left in his bank account when he was named an upstart last year. Before that, he’d been having trouble putting decent food on the table, let alone paying the team at his Seattle-based startup, Ziibra.

“Upstart helped me take care of my living costs, helped me bootstrap Ziibra, got us to the point where we got into an incubator, and got me to the point where I can start eating nutritiously,” Mor says.

I’ve known Mor for a while—he was a social media intern for Xconomy back in 2011. When I reached him to talk about Upstart, he was at the South by Southwest conference in Austin, recruiting people to join Ziibra, which lets fans support artists directly by … Next Page »

Wade Roush is a contributing editor at Xconomy. Follow @wroush

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  • http://twitter.com/sardire Steve Ardire

    Yeah Indentured Servant 2.0 business model !

    • http://www.facebook.com/jarrod.wageman.7 Jarrod Wageman

      No shit. I read this part “In return, these “upstarts” agree to pay backers a slice of their future income—up to 7 percent per year for 10 years.”

      So, if the “venture” fails, the entrepreneur and co-founders have to payback 7% of income for the next 10 years?

      That is an investment I would not take.

      A smart idea on part of the founders of the Upstart fund though in my opinion. I wonder how many would default on their payback obligation after they go broke trying to keep their company afloat.

      Yeah, yeah. Haters gonna hate.

  • http://twitter.com/shuimaojin shuimaojin

    Bald logo – great – hope more inspired young leaders are supported in their dreams

  • Jimdandy

    Indentured servant 2.0 is right.

    • jj the jj

      Especially when failure rate (even with mentor support) still exceeds success. And furthering the individuals odebt. Seems opportunistic (and unethical) on Girouard’s part.

  • http://www.facebook.com/john.j.adams.986 John J. Adams

    The one problem I see even in my own city is too much support for young entrepreneurs and too little for middle aged or older ones that have been there, failed been there again, fail, and now are there and are profiting but cannot find support to get to the next level because many investor resources are focused on that young/startup segment. The government only helps that segment. It is actually a very strange thing to me. I think I would prefer to put my money and resources into a growing business than a total unknown and untested and most importantly no-experience entrepreneur.

    • http://www.facebook.com/shannon.gass Shannon Gass

      Thank you. The first comment I felt needed to be made, has been. As a middle aged person, I can attest that life opportunities are often wasted on the youth, and the approach of only rewarding 20somethings with the right “credentials” begs the question of why do we fail to reward talent. Ah, that’s right, it’s not about talent, but about the newest sort of actuarial table, eh? Betting on future earnings… do you have a formula for children, yet?

  • http://www.socialbakers.com/ Michal Smetana

    “Venture capitalists have long said, ‘We invest in people, not ideas or businesses.’ Well, not really. We are the first people really doing it.” The first part of this statement is so much true. Venture capitalists always say that they invest in people, but in reality they invest just in the ideas these people come up with. Lets see, how this one will turn out.